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Getting property compensation under €5bn

By Fiona Mullen

In a recent article I questioned the suggestion that the cost of a united Cyprus property settlement would be €30 billion and promised to explain how I get it down to less than €5bn.

As a reminder, there is as yet no official figure on the cost of compensation. The notion of €30bn probably comes from compensation awarded by the Turkish Cypriot Immovable Property Commission (IPC). The average payout per case has been just under £300,000 (about €400,000). If you divide the amount awarded by the area compensated, then multiply it by all of the affected property, you get a figure of £22bn (about €28bn at today’s exchange rate). Note that compensation only costs €30bn if no one gets their property back.

In a future article, I shall handle valuations, but let’s take €30bn as the benchmark for the moment.

 

Scenarios only

The vast majority of IPC cases have been for land. The following should therefore be taken as scenarios for handling land, not homes. It involves some ideas that will be familiar to many, but also a couple of new ones that I believe could make a significant difference.

I am also aware that the ideas might offend people on both sides. Therefore, take the proportions here not as political proposals but as scenarios whose parameters can be shifted around to find the appropriate mix of maximum acceptability and affordability.

The exact proportions are, of course, the subject of negotiation. What we do know from leaders’ statements and interviews is that they are working on a property settlement that involves a mix of reinstatement, exchange, alternative property and compensation. Exchange involves essentially swapping ‘affected property’, as it is known, with the affected property of another displaced person.

Another important factor that has been a hallmark of decades of negotiations is the concept of territorial adjustment. Areas that are now de facto administered by TCs will become part of the GC constituent state.

Under the Annan Plan (AP): “In areas subject to territorial adjustment, properties shall be reinstated to dispossessed owners”. In other words, GC owners in these areas would get all their property back. According to a UN report to the Secretary General in April 2003 (S/2003/398), this would reinstate in full around 54% of GC dispossessed owners (around 86,000 of the originally displaced), thanks to the inclusion of what were heavily-populated GC areas. (How to limit TC displacement caused by this is a question for another day.)

 

1.4 million GC and 0.4 million TC donums

Now it is time to look at some numbers (see table below). According to Republic of Cyprus Planning Bureau figures, privately owned GC property that is now north of the buffer zone was a rounded 1.4 million donums (188,000 hectares) in 1964. Privately owned TC property in the same area was 0.4 million donums. There was also 0.4 million donums of TC property in what is now south of the buffer zone.

It has been said that not much property exchanged hands between GCs and TCs in that period. In addition, my own analysis of IPC cases shows that it has resolved less than 1% of affected GC property by area, so I am taking the 1960 situation as my benchmark.

 

Territorial adjustment cuts the bill by 25%

Under the AP territory provisions, GC property on ‘the other side’ dropped from 1.4 million donums to around 1 million donums. So territorial adjustment cuts the GC compensation bill immediately by around 25% to around €22bn, while also reinstating more than half of the originally displaced. As noted above, however, it also generates new displacement costs.

The next most effective way to cut the compensation bill is through exchange. After AP territorial adjustment, TCs would have around 0.5 million donums in the south. Exchange is a complicated business. But with the right incentives to take exchange rather than compensation, one might be able to swap all of the 0.5 million TC donums in the south for 0.5 million donums in the north. That brings the GC compensation bill down to just over 0.5 million donums (€12bn).

The next step is reinstatement. The AP provisions would not win the plain English prize. But the general principle was that you were entitled to a minimum of one donum and a home and a maximum of one-third of either your own property or alternative property.

One-third reinstatement in the TC constituent state would cut the compensation bill by another third, bringing the compensation bill to about 185,000 donums (€8bn) under a 1:1 exchange scenario.

Compensation Table

Leveraged exchange?

But €8bn is still a lot. Cutting this further involves a different approach to exchange that is potentially controversial for GCs. Since GCs might prefer to own land in an area where they speak the language, what if you offered incentives to swap 1 donum in the north for 0.8 donums in the south, plus, say, property tax waivers? (We’ll leave the politicians to decide who pays for the lost revenue). This would bring the bill for leveraged exchange plus one-third compensation down to 230,000 million donums (€5bn).

This is still a bit uncomfortable for a post-bailout country, so there is one more controversial step – this time for TCs – to bring it well under €5bn. What if you reinstated half of the remainder instead of the Annan Plan third?

This brings the compensation bill down to just 173,000 donums – just 12% of the original €30bn – or less €4bn. Even if I am out by 25%, it is still less than €5bn.

The final step is to pay higher interest rates the longer you wait (like the Republic of Cyprus retail bonds), add in some low-cost financing from international institutions, find ways of generating income from those who see a sudden rise in the value of their ‘cleaned title’, and see if we can’t bring in some real estate management experts to create revenue out of all this property changing hands.

Fiona Mullen is Director of Sapienta Economics and author of the monthly Sapienta Country Analysis Cyprus www.sapientaeconomics.com

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